Are Secondary Pharmaceutical Wholesalers causing Drug Shortages?

These days, everyone has heard of drug shortages whether or not you are in the pharmaceutical or healthcare industry. Drug shortages have become so rampant that every day the news is reporting on a shortage affecting a medical facility. Someone is to blame! It’s the secondaries!

The secondary pharmaceutical wholesale industry, sometimes referred to as the “gray market” is an industry comprised of smaller wholesalers who often come to the aid of medical facilities who are in need of a product when their primary contract cannot supply. These smaller wholesalers also pick up business that the larger companies leave behind because of their purchase volume. Of course, there are some bad apples in the industry, as with every other industry, but they are not the cause of drug shortages.

Simply, a drug shortage means there is not enough of a drug in the market to meet the demand. This leads us to the conclusion that the manufacturers should produce more product. In theory, yes but here are some key points:

Of the 300 top drug shortages, the vast majority are generic products manufactured by 3 companies.

Manufacturing companies have to abide by strict regulations and if the FDA comes in and disallows imports, such as the case with Apotex & Ranbaxy in India, this disrupts the supply chain and other competing companies cannot keep up or ramp up production quick enough.

After a product goes generic, the profit margins are much lower and so after analyzing the costs of producing more product may not be in the best interest of the manufacturer.

New manufacturers looking to enter the market have a number of barriers to entry.

Let’s say everything is perfect on the manufacturer side and there is enough production of a drug, will there still be drug shortages? Yes, the supply chain is never going to be perfect. Here’s how the typical drug supply chain looks:

Manufacturer – Distributor – Medical Facility.

Seems simple right? If we look closer, here are some reasons why drug shortages occur within even this simplest chain:

There are 3 very large distributors in the US – Amerisource, Cardinal, McKesson accounting for 300 Billion in business. A medical facility usually contracts with one distributor. So, if Amerisource, for example does not happen to have a contract with a manufacturer to bring in a supply of Lidocaine, then their facilities face a shortage that the others who have signed with another distributor do not.

Within these large distributors, they will have a number of distribution centers to service their customers. As demand increases in a certain region for a product, one of their distribution centers might run out of a product and cannot service its facilities in that region until they receive a new shipment.

Contracts end and are not renewed.

Let’s get back to the secondary wholesaler, who really are filling in the gaps when the supply chain is failing. Why is there so much scrutiny? Well, a number of reports have come out through the years showing markups as high as 8000%, on average 400% and most don’t understand the supply chain well enough to know that these companies are not even close to making this kind of markup. Here is where the supply chain gets a little complicated and a product’s supply chain can look like this: Manufacturer – Big 3 Distributor – Distributor – Distributor – Hospital. Yes, there are multiple distributors sometimes within these supply chains. Why? Because we have a state regulated pharmaceutical distribution system. For a company to sell into the state of NC, they have to have a license to distribute pharmaceuticals into that state. So, often what happens is a smaller distributor may only have a few states in which they are selling into and may have access to product that they then sell to another distributor who services the state of CA. It’s not that these distributors do not want to sell directly to medical facilities, just the regulations and costs in doing so as well as costs involved in hiring and maintaining a sales force are high.

Ultimately, the patient is paying the price here when medical facilities cannot obtain the products they need, at the time they need it and so they are forced to turn outside of their primary channels for product. Where these facilities then do pay a markup to purchase these products because there is a cost involved in procuring, ensuring a safe supply chain monitoring state & federal regulations, and verifying pedigrees. These costs then get passed along, sometimes to the GPO, often times to the patient increasing overall healthcare costs.

According to Dr. Shannon Johnson, Pharmacy Director at Sharp Memorial Hospital in San Diego, “Managing shortages takes a lot of thought, planning and coordinated execution. “ Although their hospital team meets a couple times per week to discuss new shortages he notes that, “Many times, we can get the drug if we pay a higher price, but we have to be careful that the drug we purchase doesn’t increase the chance of an error. Especially if it looks similar to another product on our shelves.”

It seems that with all the technology and advances in medicine we would be able to solve the inefficiencies in the healthcare supply chain. One company who has surfaced is Pharmly, a pharmaceutical marketplace that optimizes the supply chain for medical facilities. It’s trusted marketplace, verifies distributors, manufacturers and medical facilities before they can use the system to locate pharmaceuticals that they need. It’s cutting edge technology is able to match distributors to requests based on where they are currently licensed to sell as well as monitor drug & pricing trends throughout the region. Pharmly’s goal is to drive down healthcare costs and increase business for its vendors utilizing the system. It provides access to medical facilities for vendors who lack the contacts or staff to reach out to facilities, who might be in need.

Are secondary wholesaler’s the reason for drug shortages? The answer is no, there are a combination of factors as to why drugs go short, much more complicated than blaming a section of the market that only accounts for 1% of total industry. Drug shortages are here to stay and its our duty to utilize technologies that can provide a solution to the inefficiencies in the supply chain.